How I Invest with David Weisburd
00:37:42 · Jack Selby
[00:37:42] S1: They're ten year vehicles, and these venture firms that turn out to be b minus or worse just play the game of manage... Management fee ventures, and they just ride it out and they milk the fees and they're zombies. And so in 2021 hit, and so so many venture managers rode the wave up, top of the cycle, crystallized no gains, which is their fiduciary responsibility. I'm not saying you need to be a macro manager and know when to top ticket, but they crystallized no gains and rode the wave down. So those paper gains just went poof, and that's a real problem. So you have a vintage of venture managers that are ostensibly still in business today, but they're walking zombies because they screwed up by not returning capital to investors at the last cycle peak, which is back in 2021. So that's a problem. And now so many of those folks have reinvented their portfolios as all being AI companies. So if you had a way back machine and looked at their portfolios from five years ago, you would not see nary a mention of AI, and if you fast forward today, all of them are AI enabled companies doing something or another. And they're doing that because that is their only chance of potentially staying in business, because if they can throw a Hail Mary and have one of those companies potentially get acquired, go public, whatever sort of liquidity outcome you could have, then they can stay in business. But otherwise, they're zombies. And probably... I mean, Peter wrote an amazing editorial in Barron's about the hedge fund industry back, I think, in 2006. So... But how does that cleansing, that Darwinian culling of the herd, it just takes forever. And I've been wrong about this because I've been pounding the table about this dynamic, and I would have thought if it was a baseball analogy, we would be in the fifth or the sixth or maybe even the seventh inning of this process. And the reality is we might be in the second inning at best. It's a very, very
00:39:23 · David Weisburd, Jack Selby
[00:39:23] S0: small process. Realizing the losses. [00:39:25] S1: In terms of these firms just going the way of the dodo and going out of business. And so they're all out there, and they're they're they're trying to get in front of the same LPs, the guys that I were seeing nonstop for the first six months of the year, and the l com... LP community is like, listen. You haven't given me money back in over a decade. You haven't raised a fund in three or four years. You need to go do something else for a job. And that's a very difficult conversation. And so these firms, in the meantime, just kinda hang on for dear life, reinvent themselves as AI companies, throw a Hail Mary, see if they land the path. [00:39:54] S0: The way that I would explain this from the psychological lens is a lot of these people also have this identity as a venture capitalist. And once you're a venture capitalist, you really could only be two things. You could be a founder or a venture capitalist. That's the perception, whether real or imagined. And then if you really humble yourself, you could be a CXO at some startup. But, essentially, a lot of managers have this identity of being venture capitalists, and the pain is not painful enough for them to have to kind of decouple from this identity.
00:40:21 · Jack Selby, David Weisburd
[00:40:21] S1: I can go very deep on this. So if you're one of these b minus or worse managers that got spawned during the easy money period after the great financial crisis, what do you do? Because in venture, it's an existential crisis. It's not as if... Like, if you're an investment banker and you start your career at Goldman Sachs, and you hit a bump in the road, you can go work at Citibank. And then you hit a bump in road, you can go work at Jefferies. And you can hit a bump in the road, and no offense to any of those firms, but there's a natural kind of cascade you could potentially go through to kinda land the plane and remain employable. There's no equivalent of that in venture. If your venture firm goes south, you're done. And that means you gotta pull your kids out of private school, and maybe you can't pay the mortgage, and maybe you get divorced. It's an existential crisis for your life, you have no other choice. So you have to hold on for dear life and ride down with the ship, and it's very hard. And because of that dynamic, it makes this catharsis process that much slower to play out. [00:41:13] S0: So that's on the bottom of the stack. At the top of the stack, you have this famous study, professor Steve Kaplan, previous guest, and he did this study on the persistence of venture capital. So 52% of top quartile funds end up being top quartile. I believe roughly 75% end up being in the top 50%, so above above the median. Do you think that's gonna continue to persist in this age of AI, or do you think it'll increase or decrease?
00:41:13 · David Weisburd, Jack Selby
[00:41:13] S0: So that's on the bottom of the stack. At the top of the stack, you have this famous study, professor Steve Kaplan, previous guest, and he did this study on the persistence of venture capital. So 52% of top quartile funds end up being top quartile. I believe roughly 75% end up being in the top 50%, so above above the median. Do you think that's gonna continue to persist in this age of AI, or do you think it'll increase or decrease? [00:41:42] S1: So it doesn't directly answer your question, but let me ask you a question that I think helps get to an aspect of this that I think is arguably more interesting. So as the mega funds get larger and larger and larger and have to write minimum tickets that are commensurately very large themselves, who fills that gap below that? So they're sucking up. They're hoovering up all the capital. Who's left to write those tickets that are less than $20,000,000? Are these the little micro funds that are gonna do that? It's a real gap that's being left. So I think that has to be examined. And then if you're an allocator, do you put a fund like mine or benchmark, relatively small funds, in the same bucket as Marc Andreessen, who manages, I don't know, $60,000,000,000? Are those the same investment type managers? Like, you have a Yale endowment model, what buckets do you put those two firms in? Do you put them in the same bucket?
00:42:34 · David Weisburd
[00:42:34] S0: Empirically, seems like no. I had Eric Swerd some from AngelList, and AngelList is very interesting because they have one of the biggest datasets in the world. I think arguably the biggest on... When it comes to startups. I think 25,000 companies or so. And especially today, they use AI. They use the latest machine learning. And they figured out an interesting thing, which is they couldn't run the same mathematical models on all of venture. In other words, it was essentially two completely different and idiosyncratic asset classes, aka the early stage and the late stage. So even mathematically, it doesn't compute to just focus on venture capital as one asset class, meaning to assess pre seed the same way as you would a pre IPO company.
00:43:15 · Jack Selby
[00:43:15] S1: Totally agree. Yeah. I think the mega funds are a different asset class. I'm not saying they're better or worse. They're just in a different bucket. And earlier stage guys, like with what I do, I think we're in a different bucket. There's almost an analogy with what we do as being akin to middle market private equity in the sense that there's a difference... Important difference in the sense that I'm investing in business that are... Businesses that are in these middle market geographies. I'm not taking control stakes, but I only wanna work with entrepreneurs that want my help. So it's like synthetic control. And because it is venture, I do have more of a chance of going to zero than a typical, you know, private equity type business. But hopefully, that is compensated by the fact that my company should have better growth rates. They should have better margins, so therefore, should have a better multiple. Other than that, you could put me in the middle market private equity bucket if you so chose, because I think there is a a high degree of similarity.